What is matching concept in finance & accounting?

Finance ManagementAccountingAcademic Content

Matching concepts tells about expenses incurred during a period to be recorded in the same period in which revenues are earned. Revenues and expenses in income statement are matched for a period of time. Investors get a better idea about economics of the business.

Product cost − These are tied directly to products and in turn revenues.

Period cost − These don’t have corresponding revenues.

Commission − If an employee earned x% of commission on sales in current month and that commission is paid in next month, then that transaction is recorded in present month.

Depreciation − If a company buys a machine and its life is 8 years. Then, cost of equipment is recorded in depreciation expenses at the rate of cost per year.

Employee bonuses − It is based on employee performance in that financial year he/she will earn bonus in that year and will be paid next year.

Benefits of matching concept includes −

  • Consistency in financial statements.
  • To avoid misstating profits for a period.
  • Balance cost over a period of time.
  • Long term assets experience depreciation.
DateDescriptionDebitCredit
18 – JanCash8000

Shareholder equity
8000
20- JanTotal account1800

Cash

22- JanCash300

Accounts receivable2200

Service revenue
300

Unearned service revenue
2000
23- JanCash1350

Unearned service revenue
1350
27 - JanCash1800

Account receivable
1800
31 – JanWages expense10000

Wages payable
10000

Total


Last entry

2 – FebWages payable6000

Cash
6000

Total60006000

In the above table, last entry made in Feb 2, but a temporary entry made in Dec 31st which is the actual payment date. Since, it is close of the month and the actual transaction is made on Feb 2nd another entry is made on Jan 22nd but the actual amount is received on Jan 27th.

Similarly, contract was received on Jan 23rd and cash was paid as well, so it has to be entered on same date instead of Feb 2nd where contract was carried out.

raja
Published on 12-Aug-2020 11:06:48
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